UNLOCKING THE POTENTIAL OF DIGITAL ASSETS.
By Robert Mitchnick, Head of Digital Assets for BlackRock & Scott Moskowitz, Head of the Digital Assets Lab
Digital assets are at an inflection point—and financial services leaders should be paying attention to the client demand and technological infrastructure driving changes across the landscape.
From the early days of cryptocurrencies to newfound excitement in tokenization, the world of digital assets has evolved rapidly.
Tokenization creates a digital representation of a traditional asset, tangible or nontangible, on a blockchain. This process gives asset owners access to some of the benefits of blockchain technology, including lower operating costs and improved transparency. It also has the potential to be transformative for capital markets, by redefining the role many market intermediaries play (while eliminating others altogether), toward an end state where investors can transact directly with each other, intermediated only by a blockchain. Importantly, regulators will still have a key role to play in overseeing these transactions and ensuring that investor protections are maintained across crypto markets.
Part of this transformation lies in expanding economic opportunities.
Many assets that are currently not investable—or are only available to a small subset of investors—can become investable through tokenization. And that unlocks new potential and more participation in the economy.
76% of institutional investors have evaluated the prospect of asset tokenization in portfolio strategies, while just a quarter are considering blockchain.
Source: Institutional Investor's Tech Futures Survey 2024
Some industry leaders have already indicated they see digital assets as a major factor in the future, and some analyst forecasts predict dramatic growth in tokenized digitized securities.
What does that mean for leaders at these firms? Perhaps, it’s time to get your commercial strategy and tech strategy in place. We think a good place to start is to focus efforts on where the client demand is currently and the capabilities that clients are seeking.
In that way, it’s essential to embrace the foundational infrastructure necessary to handle both cryptocurrencies and tokenized assets, which includes cryptoasset trading and custody infrastructure. Entering this space will also require a proper understanding of the new risks associated with blockchain technology. Building secure infrastructure with appropriate governance and oversight can help mitigate risks such as smart contract risk, user-error, and theft.
This is also where strategic partnerships are key. Choose the right partners to help build an adept team that can be ready to take advantage of commercial opportunities as the regulatory and technological landscape evolves.
From the perspective of a CTO, it’s critical to be able to take those steps as the industry navigates a shifting investing environment.
In the next five to seven years, it is increasingly likely that digital assets will become a standard component of portfolios for institutional investors. In fact, this is a trend that is already occurring, with cryptoassets back to $2 trillion in market cap and rapidly drawing in new investors due to increasing accessibility. In our view, tokenization is poised to evolve as well, albeit more slowly. There is a potential for a gradual transition to a world where digital assets become more widely adopted. The full realization of tokenization probably won’t happen in the next five years, but we expect to see progress in pockets, across certain asset classes and geographies.
As is the case with any new technology or asset class, there are many unknowns about how digital assets will evolve and what impact they’ll have across investing and asset management. But with the space poised to grow in a significant way, it’s prudent for leaders to start crafting strategies that will help unlock potential value from the new opportunities that can emerge and prepare their organizations for the change that is to come.
ALADDIN INNOVATIONS With our user-provider model, we pair industry practitioners with first-class technologists and engineers.
Our partnership with Coinbase is illustrative of that approach. In 2023, we went live with digital asset support in Aladdin®, enabling more unified investment management—leveraging Coinbase for trading, prime broker, and custody capabilities.
Additionally, the Aladdin® platform’s risk engine (inclusive of Aladdin Wealth™) incorporates digital asset risk factors allowing clients to assess cryptoasset exposures in the context of the Whole Portfolio, including understanding risks and correlations.
